Magazine article American Banker

Yes, Payday Borrowers Are Forced to Take out More Loans

Magazine article American Banker

Yes, Payday Borrowers Are Forced to Take out More Loans

Article excerpt

Byline: Linda Sanchez

American Banker recently published a column defending payday loans. The author takes issue with those who say borrowers are "forced" to take out another loan, arguing that this word is too strong. "Forced" is not too strong a word.

Payday lenders often pull payments directly from a borrower's checking account as soon as they get paid, so by the end of the month most people cannot pay off their loans and cover their normal living expenses. They end up taking out loan after loan to cover the difference at the end of the month, falling into a swift downward cycle of debt.

Borrowers feel trapped because they are faced with two terrible choices: take out another exploitative loan because of the shortfall created by the first loan, or face a range of catastrophic consequences associated with defaulting.

These predatory payday loans are misleadingly marketed to cash-strapped borrowers as a one-time quick fix for their financial troubles. In my work representing California's 38th congressional district, I have seen the real life impact these loans create on hardworking men and women struggling to make ends meet.

At a recent roundtable in my district, Davina Dora Esparza, a former payday loan borrower from East Los Angeles, told me: "I was stuck in the payday loan debt trap for over three years and paid over $10,000 in fees alone on multiple payday loans. This experience created a lot of stress for me and I couldn't find a way out. I ended up defaulting on my loans earlier this year, and I will never go back."

If we can look beyond lawyerly semantics, we can easily see most payday, car title and installment loans are carefully designed to trap borrowers in debt and maximize profits. According to a Department of Defense report, "The debt trap is the rule, not the exception." The CFPB's own research found that over 75% of payday loan fees were generated by borrowers who took out more than 10 loans a year. …

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